INSIGHTS BLOG

OUR FIVE PICKS FOR 2021

Mark Lister, 11 January 2020

For many years the New Zealand Herald has asked the major sharebroking and wealth management firms to nominate five NZX companies they think will do well in the year ahead.

Astute investors will appreciate that any sensibly constructed portfolio will contain more than five stocks, and will not be limited to one asset class or region.

Nonetheless, the tradition is an interesting way to gain some insights into what the various investment strategy teams are expecting for the year ahead. In this report we outline the five stocks we landed on for 2021.

We have no misgivings about picking two of last year’s stocks again. We are long-term investors and some of our best ideas are ones we have supported for many years, even decades.

Companies which were close to making the cut that also deserve a notable mention include Freightways, Contact Energy, Spark and Summerset, all of which we view very positively.

But first, how did we do in 2020?

Of the six participants in 2020 we came in first place (by a slim margin) with a gain of 21.3%. This compares very well with the 13.0% return for the NZX 50 during the same period, which in itself was highly impressive given the events of this past year. Our five companies for 2020 were:

  1. a2 Milk (-27.3%)
  2. EBOS Group (+26.1%)
  3. Freightways (+19.8%)
  4. Mainfreight (+50.6%)
  5. Meridian Energy (+37.6%)

Five out of six participants picked a2 Milk, which highlights the almost unanimously positive view on the company that prevailed this time last year. Having been a stellar performer in recent years, the company was hit hard by the effects of the COVID-19 pandemic. As extended border closures and follow-up lockdown measures in Australia took hold, the important diagou channel began to feel the effects of these restrictions. Had it not been for these events, a2 Milk would’ve had a much better year.


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The company was still in a trading halt when we sat down to ponder our 2021 choices, so it wasn’t considered as we didn’t have full information at that time. However, the more than 20% fall that it suffered when this halt was lifted certainly makes it more interesting as we look ahead to 2021, and it could represent attractive value if the company can get itself back on track during the first half of the year.

We would caution against our clients expecting us to repeat this top of the podium finish on a regular basis. Our approach doesn’t lend itself to coming first in a contest like this. Minimising volatility, focusing on sustainable (and growing) dividends, and sticking to quality are key tenets of our investment philosophy. We have full confidence in this approach as a long-term generator of wealth, as evidenced by our impressive track record over the past two decades.

However, to come out on top within just 12 months one often needs to be of a short-term trading mindset and take on more risk than we are comfortable doing. Having said that, we believe it is important to celebrate our successes and we are very proud of our team for taking out the Herald’s 2020 Broker Picks trophy.

Looking ahead to 2021

We think 2021 is shaping up as a year of recovery, rebound and normalisation. We should see gradual progress towards a reopening of many economies across the world, which should boost global economic activity and corporate earnings, making for a relatively positive investing backdrop.

New Zealand has its challenges, but the economy is generally in good shape. Fonterra’s dairy payout forecast has been increased twice in the past few months, the housing market is extremely buoyant, business confidence has returned to pre-COVID levels and the unemployment rate hasn’t risen nearly as much as expected.

We expect the NZ dollar to remain strong, which could be a headwind for some exporters. This is merely the downside of our strong economic position, and buoyant sentiment amidst global markets.

The low interest rate environment is unlikely to change in the foreseeable future, particularly for short-term rates as the Reserve Bank keeps its foot on the gas in terms of monetary stimulus.

In contrast, we might see longer-term interest rates rise modestly as the economic outlook improves. This is unlikely to derail the recovery, although it might take the shine off some of the higher yielding investments that performed so well in 2020.

Against this backdrop we want to make sure we have a balance between companies that provide predictable, steady returns and sustainable dividends, and those a little more exposed to a recovering economy.

The five companies we selected for 2021 are:

  1. EBOS Group
  2. Fisher & Paykel Healthcare
  3. Mercury NZ
  4. Mainfreight
  5. Ryman Healthcare

EBOS Group

EBOS is Australasia’s largest diversified pharmaceutical and veterinary products group. The company has a solid track record of earnings growth which has been driven by both organic growth and astute acquisitions.

We are attracted to the defensiveness of the company's two key divisions – healthcare and animal care. The structural demand story for healthcare products as the population ages remains robust, while pet ownership continues to increase and will provide further growth opportunities.

Fisher & Paykel Healthcare

Fisher & Paykel Healthcare is one of the highest quality companies listed on the NZX. It has excellent products and leading positions in the markets in which it operates, as well as a proven track record and significant future growth opportunities.

FPH has been a beneficiary of the pandemic during 2020, with its products being rapidly embraced in response to the health crisis. This has expanded the company's market and sets the business up well for continued growth.

One obvious headwind for the company during 2021 will be the strong NZ dollar. While this could be a drag on earnings, it doesn’t change the fact that we see strong growth potential across the underlying business.

Mercury NZ

The electricity sector has a stable demand profile and generates strong, predictable cash flows. Mercury is a low marginal cost producer of electricity with a long-life renewable generation base and a loyal customer base.

The company’s strength is its North Island hydro generation schemes, which insulate the business from any disruption that could arise should the Tiwai Point aluminium smelter close.

Mercury also has a strong focus on sustainability and should benefit from the drive towards a cleaner environment.

Mainfreight

Mainfreight is simply a great New Zealand company. It has an impeccable track record, a strong management team and culture, and no shortage of global growth options.

The company performed extremely well in 2020, and we think the platform has been set for an even better 2021, particularly if we see an economic rebound take hold as many countries begin to reopen.

The only negative we can point to is that Mainfreight is highly priced. Then again, as is the case with real estate, highly quality businesses are rarely cheap.

Ryman Healthcare

Ryman is New Zealand’s leading listed retirement and aged care provider. We see Ryman as the best operator in the sector, based on its high-quality portfolio, land bank, proven track record and continuum of care model.

A buoyant housing market will benefit the company in 2021, while the expansion into Australia should get back on track following the lockdowns in Victoria.

The company handled the pandemic extremely well, which will have earned Ryman huge goodwill with existing residents as well as ensuring broader brand recognition.

 

This article was also published in the New Zealand Herald under the title 'Brokers' Picks: The hot stocks to watch in 2021'